The growing push for energy transition globally requires sustainable investments to increase in tandem. An estimated US$1.3 trillion in annual investments in renewables are needed by 2030 to reach the goals set out in the Paris Agreement. Public policy will be a key driver in mobilizing investment. A recent study by ACI finds that more binding climate policies, such as subsidies or carbon taxes, have a greater impact on sustainable investments than nonbinding ones.

The study examines the dynamic effects of different climate policy decisions on (1) inducing sustainable venture investments, (2) the channel of policy transmission, (3) the business outcomes of firms founded in the years after climate policy decisions, and finally, (4) the environmental outcomes following climate policy decisions.

Findings indicate that it takes years for new climate policy shocks to induce significant changes in the level of sustainable investment, and there’s substantial heterogeneity in the effects of different policies. Legally binding policies tend to have a more sizable impact on sustainable investments than the nonbinding ones.

The impact of climate policies also differs depending on their stringency. More stringent ones that potentially incur costs to firms, such as new regulatory requirements, are found to stifle investments – especially among the newborn start-ups – whereas the less stringent subsidy-based policies or policy support, strategy, and target are found to induce investments mainly in newly founded start-ups.

The study further assesses the efficiency of these policies by comparing business and environmental outcomes post-policy. The study finds that a higher number of more stringent cost-imposing climate policy instruments (think of carbon taxes) predict more favorable business outcomes, such as more funding rounds, higher rate of exit, and lower inactive share among start-ups founded in the years after such policy decisions. Cost-imposing climate policy instruments also outperform others in inducing renewable energy generation.

The study highlights that to meet national climate ambitions, it is important for countries to not only enact climate policies that stimulate investments but also assess the efficiency associated with the investments post-implementation.

By HUANG, Yijia

Researcher: LIU, Jingting